As a procurement leader, it is important to ask the following questions: What do I know about our suppliers? What should I know that I don’t?
Most businesses can tell you anything you want to know about their customers. Not only do companies know who their customers are, organisations also know their clients’ wants and needs, purchasing patterns, risks and priorities, contract terms and committed service levels. Businesses are expected to know what a customer pays versus what they are supposed to pay, as well as which type of customer will pay more for specific items and those that will pay less. To put it simply, they understand the detailed financial implications of a change in any customer relationship.
However, these same businesses rarely put the same level of emphasis on understanding their suppliers and many struggle to identify their most strategic relationships. Other than a handful of core vendors, they cannot tell you who their preferred suppliers who have actual contracts in place are compared with those not under contract. Often, these businesses are not even sure what some suppliers do. They do not know who to call when there is a problem because they lack basic information about their suppliers to reference. Without details of their pricing arrangements, service level agreements (SLAs), capabilities and historical performance, they are unable to understand the business impact if a supplier is lost or changes terms.
Yet understanding this impact is critical.
According to a recent study by supply management research firm, Ardent Partners, just 57% of an organisation’s spend is contract compliant.
At SpendHQ we typically find maverick and off-contract spend accounts for 40%-60% of our clients’ expenditure. Most companies only monitor pricing compliance on portions of their direct spend and not at all for their indirect spend. We see organisations, ranging from the Fortune 500 to mid-market private equity firms, where they have vendors with significant spend and strategic importance operating outside of any formal contract. In addition, we come across categories with incredibly fragmented spend, spread across myriad vendors, with no strategic focus on these vendor relationships. Additionally, we may find certain vendors no longer meet the requirements that they committed to during the initial sourcing project. Many critical suppliers are managed without key performance indicators or reviews of existing SLAs. Most are not even monitored for the most basic business attributes, such as changes in executive leadership or failure to meet production goals, revenue targets, or risk criteria.
Vendor management is critical to maintain, and can be the difference between gaining significant financial outcomes for your business or not.
Here are the four main reasons why procurement should not ignore vendor management:
Overall, having greater insight and visibility into the suppliers that are critical to the business is crucial to the success of procurement’s role in any organisation.
Darren Shipp is senior vice president of product and operations at spend analysis software solution SpendHQ
This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.